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TD Securities' yield curve model shows 55% chance of a US recession

[NEW YORK] The longest-ever US economic expansion is at risk with a 55 per cent chance it may slip into a recession within 12 months due to trade tensions and softening global growth, TD Securities analysts said on Wednesday, based on their model of the US yield curve.

TD Securities said its recession model is based on the spread between 3-month Treasury bill rates and the 10-year note yields.

The premium on 3-month Treasury bill rates over 10-year Treasury note yields reached nearly 40 basis points on Wednesday, its highest level since March 2007, according to Refinitiv data. Typically, 3-month bill rates are lower than 10-year yields.

The two maturities first inverted in March before normalising. They inverted again in May and have stayed that way since.

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An inversion of 3-month rates and 10-year yields has preceded every recession in the past 50 years.

"The inversion seemed to accelerate after May due to greater fears about global growth and trade policy uncertainty," TD analysts wrote in a research note.

Due to these risks to the economy, they expect the Federal Reserve will lower rates by a quarter-point at its next two policy meetings, in September and October. They forecast it would reduce borrowing costs by another 75 basis points in 2020.

Last week, Fed policy-makers cut US rates for the first time since 2008.

REUTERS